What is Commodity Options Trading? (with picture)

Felicia Dye
Felicia Dye
Corn is a common food commodity that is tradied on option.
Corn is a common food commodity that is tradied on option.

Commodity options trading can be a hobby, a profession or an investment scheme, depending upon a person’s level of involvement. It is helpful to think of commodities as raw goods. Gold, corn and cotton are common examples. Commodity options trading is a practice that allows people to buy and sell raw goods at a predetermined price.

The term “price speculation” may be linked to commodity options trading. That is because success is generally dependent on speculating whether prices will rise or fall. If a person believes that the price of a certain commodity will rise, she may use a call option. This will give her the right to buy a certain quantity of an item in the future at a price that is determined today. This can be beneficial if the price today is $10 US Dollars (USD), but next week she can sell the items for $15 USD.

A person who has commodities and who believes that prices will drop may use a put option. This gives him the right to sell his commodities in the future for a price that is determined today. He may want to do this because he foresees potential losses if he waits and sells under different market conditions.

An option generally requires the payment of a premium. The premium is usually a percentage of the total value of the potential deal. Options also tend to have expiration dates. A person must decide whether or not to exercise the right to buy or sell by that date.

If the price does not move in favor of the option holder, she may choose not to buy or he may choose not to sell. An option does not generally involve commitments. People normally do not exercise their rights when it will result in substantial losses. Those people will still experience some losses, because the premium is generally nonrefundable.

Commodity options trading involves high risks but the returns can also be high. If a person wants to do such trading herself, she can get started online without needing large sums of money. She will, however, need to find a broker or brokering company. This entity acts as a middle man between traders. Those who are wary of losing money in the beginning may want to get a dummy account, which allows one to practice trading without real money.

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    • Corn is a common food commodity that is tradied on option.
      Corn is a common food commodity that is tradied on option.